Although Egypt’s economic reform programme has improved the country’s macroeconomic performance and restored confidence in its economy, the reforms have not triggered a marked and sustained increase in Egypt’s private sector investments, according to the World Bank.
A report on creating markets in Egypt, issued on Monday, showed that while the share of private investments in Egypt’s economy has started to grow, these investments remain below its historical average — 54 percent — and considerably lower than in peer countries.
The report also said that Egypt's economy is at a turning point amid the COVID-19 shock.
Moreover, the depreciation of the Egyptian pound after flotation, implemented in November 2016, improved the trade deficit, but export competitiveness remains weak and export proceeds are well below those of other countries, according to the report.
The number of exporting firms is critically low, with only 9 percent of manufacturing firms exporting directly, according to the report.
The report also noted that Egypt’s participation in global value chains is low as well compared to its peers, as exports are mainly centred around primary commodities and less sophisticated products.
“Moving upstream to higher value-added complex manufacturing activities in Egypt is hindered by the cost and lack of availability and quality of critical inputs and technology, and efficient transport and logistics services. Consequently, despite Egypt’s growing domestic market and proximity to international markets, Egypt is yet to attract strong foreign direct investment inflows aiming to harness either its large domestic market or to connect Egypt in the global value chain based international trade that is impactful in reducing poverty and creating productive jobs”, the report explained.
Due to the COVID-19 crisis and its impacts on the private sector scene in Egypt, the report said that the pandemic has boosted these challenges and created new ones.
In this regard, the report demonstrated that fiscal targets and external balances are being affected by the slowdown in economic growth, increased spending on health and social protection, and lower tax revenues.
Additionally, the shortfall in essential sources of foreign currency, notably from tourism, Suez Canal revenues, and remittances from oil-exporting countries of the Gulf Cooperation Council will worsen the country’s external position at least in the near-term, the report expected.
Financing needs have increased as well, putting a progressive pressure on the already elevated government debt, according to the report.
Furthermore, many firms have been affected by shocks to both supply and demand with a negative impact on their balance sheets, and some may be pushed to bankruptcy as operations get disrupted and demand contracts, the report expected.
The report also said that informal firms and workers are particularly vulnerable, with few buffers to protect them from health and income shocks.
In this regard, the report highlighted Egypt’s government procedures to alleviate the pandemic’s impacts, including introducing large cut in key interest rates — reaching 4 percent over 2020, deferring tax payments for affected sectors, and expanding coverage of social assistance to vulnerable groups.
The report also counted the main obstacles that hinder the private sector in the country from being a pivotal player in the market, including trade barriers caused by policy and facilitation, inadequate transport and logistics that contribute to Egypt’s performance in exports and foreign direct investment in non-extractive sectors, the privileged role of the state in economic activities and concerns around competing in an uneven playing field, the lack of clear separation between the state’s regulatory policy and operational bodies in certain markets that creates an inherent conflict of interest, the low performance of commercial justice that increases investment risks and uncertainty and disproportionately affects smaller enterprises.
In dealing with these challenges, the report urged the government to create a reform committee with inclusive participation from the public and private sector to be instrumental in advancing the regulatory reform agenda, including doing business reform actions.
It also called on the government to develop a transparent state ownership policy and governance framework that could enable the private sector to make investment decisions based on a better understanding of the state-owned enterprises’ weight in their respective sectors.
The report urged the government to strengthen the legal framework of state owned enterprises as well as a critical action to reinforce corporate governance and transparency.
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